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Revenue
3 Months Ended
Mar. 29, 2019
Revenue from Contract with Customer [Abstract]  
Revenue
REVENUE
Performance Obligations
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in ASC Topic 606. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. To determine the proper revenue recognition method, consideration is given as to whether a single contract should be accounted for as more than one performance obligation. For most of our contracts, the customer contracts with us to perform an integrated set of tasks and deliverables as a single service solution, whereby each service is not separately identifiable from other promises in the contract. As a result, when this integrated set of tasks exists, the contract is accounted for as one performance obligation. The vast majority of our contracts have a single performance obligation. Unexercised contract options and indefinite delivery and indefinite quantity (IDIQ) contracts are considered to be separate contracts when the option or IDIQ task order is exercised or awarded.
Contract modifications are routine in the performance of our contracts. Contracts are often modified to account for changes in contract specifications or requirements. In most instances, contract modifications are for goods or services that are not distinct, and therefore, are accounted for as part of the existing contract.
Our performance obligations are satisfied over time as services are provided throughout the contract term. We recognize revenue over time using the input method (e.g., costs incurred to date relative to total estimated costs at completion) to measure progress. Our over time recognition is reinforced by the fact that our customers simultaneously receive and consume the benefits of our services as they are performed. This continuous transfer of control requires that we track progress towards completion of performance obligations in order to measure and recognize revenue. Determining progress on performance obligations requires us to make judgments that affect the timing of revenue recognition. Remaining performance obligations represent firm orders by the customer and exclude potential orders under IDIQ contracts, unexercised contract options and contracts awarded to us that are being protested by competitors with the U.S. Government Accountability Office (GAO) or in the U.S. Court of Federal Claims. The level of order activity related to programs can be affected by the timing of government funding authorizations and their project evaluation cycles. Year-over-year comparisons could, at times, be impacted by these factors, among others.
Our contracts are multi-year contracts and typically include an initial period of one year or less with annual one-year (or less) option periods. The number of option periods varies by contract, and there is no guarantee that an option period will be exercised. The right to exercise an option period is at the sole discretion of the U.S. government when we are the prime contractor or of the prime contractor when we are a subcontractor. We expect to recognize a substantial portion of our performance obligations as revenue within the next 12 months. However, the U.S. government or the prime contractor may cancel any contract at any time through a termination for convenience or for cause. Most of our contracts have terms that would permit us to recover all or a portion of our incurred costs and fees for work performed in the event of a termination for convenience.
Remaining performance obligations increased by $619.7 million as of March 29, 2019 as compared to December 31, 2018. We expect to recognize approximately 75% of the remaining performance obligations as of March 29, 2019 as revenue in 2019, and the remaining 25% during 2020. Remaining performance obligations as of March 29, 2019 and December 31, 2018 are presented in the following table:
 
 
March 29,
 
December 31,
(In millions)
 
2019
 
2018
Performance Obligations
 
$
1,478

 
$
858


Contract Estimates
Accounting for contracts and programs involves the use of various techniques to estimate total contract revenue and costs. For contracts, we estimate the profit on a contract as the difference between the total estimated revenue and expected costs to complete a contract and recognize that profit over the life of the contract.
Contract estimates are based on various assumptions to project the outcome of future events. These assumptions include labor productivity and availability; the complexity of the services being performed; the cost and availability of materials; the performance of subcontractors; and the availability and timing of funding from the customer.
The impact of adjustments in contract estimates on our operating income can be reflected in either revenue or cost of revenue. Cumulative adjustments for the three months ended March 29, 2019 and March 30, 2018 are presented in the following table:
 
 
Three Months Ended
 
 
March 29,
 
March 30,
(In thousands)
 
2019
 
2018
Favorable adjustments
 
$
2,502

 
$
4,152

Unfavorable adjustments
 
(3,585
)
 
(1,311
)
Net (unfavorable) favorable adjustments
 
$
(1,083
)
 
$
2,841


For the three months ended March 29, 2019, the net unfavorable adjustments to operating income decreased revenue by $0.4 million and for the three months ended March 30, 2018, the net favorable adjustments to operating income increased revenue by $3.4 million.
Revenue by Category
Generally, the sales price elements for our contracts are cost-plus, cost-reimbursable or firm-fixed-price. We commonly have elements of cost-plus, cost-reimbursable and firm-fixed-price contracts on a single contract. On a cost-plus type contract, we are paid our allowable incurred costs plus a profit, which can be fixed or variable depending on the contract’s fee arrangement, up to funding levels predetermined by our customers. On cost-plus type contracts, we do not bear the risks of unexpected cost overruns, provided that we do not incur costs that exceed the predetermined funded amounts. Most of our cost-plus contracts also contain a firm-fixed-price element. Cost-plus type contracts with award and incentive fee provisions are our primary variable contract fee arrangement. Award fees provide for a fee based on actual performance relative to contractually specified performance criteria. Incentive fees provide for a fee based on the relationship between total allowable and target cost. On most of our contracts, a cost-reimbursable element captures consumable materials required for the program. Typically, these costs do not bear fees.
On a firm-fixed-price type contract, we agree to perform the contractual statement of work for a predetermined contract price. A firm-fixed-price type contract typically offers higher profit margin potential than a cost-plus type contract, which is commensurate with the greater levels of risk we assume on a firm-fixed-price type contract. Although a firm-fixed-price type contract generally permits us to retain profits if the total actual contract costs are less than the estimated contract costs, we bear the risk that increased or unexpected costs may reduce our profit or cause us to sustain losses on the contract. Although the overall scope of work required under the contract may not change, profit may be adjusted as experience is gained and as efficiencies are realized or costs are incurred.
The following tables present our revenue disaggregated by several categories. Revenue by contract type for the three months ended March 29, 2019 and March 30, 2018 is as follows:
 
 
Three Months Ended
 
 
March 29,
 
March 30,
(In thousands)
 
2019
 
2018
Cost-plus and cost-reimbursable ¹
 
$
251,478

 
$
230,208

Firm-fixed-price
 
74,450

 
90,308

Total revenue
 
$
325,928

 
$
320,516


 
 
 
 
¹ Includes time and material contracts
 
 
 
 

Revenue by geographic region in which the contract is performed for the three months ended March 29, 2019 and March 30, 2018 is as follows:
 
 
Three Months Ended
 
 
March 29,
 
March 30,
(In thousands)
 
2019
 
2018
Middle East
 
$
226,416

 
$
219,880

United States
 
71,410

 
73,788

Europe
 
28,102

 
26,848

Total revenue
 
$
325,928

 
$
320,516


Revenue by contract relationship for the three months ended March 29, 2019 and March 30, 2018 is as follows:
 
 
Three Months Ended
 
 
March 29,
 
March 30,
(In thousands)
 
2019
 
2018
Prime contractor
 
$
307,058

 
$
301,028

Subcontractor
 
18,870

 
19,488

Total revenue
 
$
325,928

 
$
320,516


Revenue by customer for the three months ended March 29, 2019 and March 30, 2018 is as follows:
 
 
Three Months Ended
 
 
March 29,
 
March 30,
(In thousands)
 
2019
 
2018
Army
 
$
226,692

 
$
237,847

Air Force
 
67,931

 
65,255

Navy
 
15,110

 
8,357

Other
 
16,195

 
9,057

Total revenue
 
$
325,928

 
$
320,516


Contract Balances
The timing of revenue recognition, billings and cash collections results in billed and unbilled accounts receivable (contract assets) and customer advances and deposits (contract liabilities) on the Condensed Consolidated Balance Sheets. Amounts are billed as work progresses in accordance with agreed-upon contractual terms at periodic intervals (e.g., biweekly or monthly). Generally, billing occurs subsequent to revenue recognition, resulting in contract assets. However, we may receive advances or deposits from our customers, before revenue is recognized, resulting in contract liabilities. These advance billings and payments are not considered significant financing components because they are frequently intended to ensure that both parties are in conformance with the primary contract terms. These assets and liabilities are reported on the Condensed Consolidated Balance Sheets on a contract-by-contract basis at the end of each reporting period.
As of March 29, 2019, we had contract assets of $195.7 million. Refer to Note 7, "Receivables" for additional information regarding the composition of our receivables balances. As of March 29, 2019, our contract liabilities were insignificant.